The most recent bank merger proposal in Bangladesh reflects a pressing need for action due to Bangladesh Bank's determination to instill essential discipline and oversight in the financial sector, which is plagued by widespread irregularities. As part of the strategy, the central bank has been reported to have plans to merge at least 10 banks within January next.

Bank mergers are often indicated as instruments for fortifying the banking sector. By consolidating resources, expertise, and market presence, merged entities can potentially achieve economies of scale, enhance operational efficiency, and diversify their product offerings. This consolidation is particularly important in Bangladesh, with 61 scheduled banks being present in the market out of which 10 to 20 can be considered weak due to the weak governance and loan irregularities.

Despite the potential benefits, bank mergers are not without challenges, especially for stronger banks. Integrating disparate cultures, systems, and processes can pose operational hurdles and divert management's attention. Technological integration is another factor that might be a tricky business when it comes to such integration. Moreover, assuming the liabilities of weaker banks, including their non-performing loans (NPLs), could strain the balance sheets of stronger entities and undermine their stability.

At the heart of the merger process lies the valuation of the involved banks and its ramifications for shareholders. Shareholders of stronger banks may initially have to bear the brunt of the weaker bank's lower valuation, the absorption of NPLs and possibly lower dividends post-merger due to poor financial performance. In such a case, it is very likely for strong banks to have an inertia against merging with a weak bank as such mergers also have the possibility of straining the reputation of the former.

One of the most talked-about mergers in Bangladesh's banking landscape is the proposed consolidation between Padma Bank and EXIM Bank, a MoU for which was signed recently. Although, the government has been pushing this merger, many analysts including the World Bank are thinking this may be a hasty move and have raised concerns regarding the ultimate success.

After the Padma-EXIM Bank merger, the absorption of ICB Islamic Bank by a stronger counterpart is now under discussion. Frozen deposits, capital shortfall, high defaulted loans and liquidity crisis have played pivotal roles in leading the bank to where it is today.

There are also examples that mergers alone cannot guarantee success. The case of Bangladesh Development Bank Ltd (BDBL), formed after the merger of Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha, serves as a humble reminder. Despite the consolidation, BDBL continues to grapple with challenges, particularly in managing its default loans. This underscores the complexity of merging weak entities and highlights the importance of rigorous due diligence, prudent risk management, and effective post-merger integration.

Drawing insights from neighbouring India, there have been examples of both voluntary and forced mergers. In 2021, 10 public sector banks in India were consolidated to form four banks. The amalgamation of Bank of Baroda with Vijaya Bank and Dena Bank is one such example. The objective of such mergers in the banking sector has been strengthening the economy, enhancing profitability, reducing non-performing assets (NPAs), improving efficiency, and expanding the reach of the branch network. In Sri Lanka, the small and mid-sized banks may merge with other financial institutions in order to create synergy.

An example of an ongoing bank merger on the global front is the merger between UBS AG and Credit Suisse AG, which is expected to be completed by 2024. Both these entities are big names in the financial industry, and it will be interesting to see how the post-deal synergies work out.

In navigating the complexities of bank mergers, regulatory oversight and stakeholder engagement play pivotal roles. Regulators must ensure that mergers adhere to stringent guidelines, promote healthy competition, and safeguard the interests of depositors and investors. Additionally, effective communication and transparency are essential in managing stakeholder expectations and building trust in the merger process.

Beyond regulatory considerations, successful bank mergers hinge on meticulous planning, robust risk management, and effective post-merger integration strategies.

The writer is an economic analyst.